Margareta Pagano: Favourites fade as Bank Governor race hots up

New names in the frame to take on huge challenge of rebuilding the City's reputation with plenty of question marks hanging over the leading fancies

The race to become the next Governor of the Bank of England reminds me of the nursery rhyme: 'Ten green bottles sitting on the wall/And if one green bottle should accidentally fall/There'll be nine green bottles sitting on the wall'. And so the ditty goes until all the bottles come crashing down.

By the end of last week it inadvertently looked as though the Libor-fixing conspiracy may have pushed at least two of the strongest contenders for the job – Paul Tucker and Lord Turner – off the wall, certainly scrambling to hold on. Even Lord Green, the saintly trade minister who ran HSBC and who has been touted as a potential candidate, looked on shakier ground after the news that his former employer faces $1bn of fines in the US over lax anti-money-laundering controls.

Odds on Tucker, the deputy governor and long-standing favourite, have lengthened from 4-5 pre-Libor to 5-2 after his Treasury Select Committee appearance last week.

It's not that Tucker has been implicated by the Libor fixing – as Bob Diamond in his testimony had seemed to imply – but he has become tainted by the confusion over what did actually happen in those dark days of the financial crisis.

Tucker still has big support from City professionals – precisely because of his deep knowledge of the markets – but even they are beginning to mutter that the Old Lady needs plucking her eyebrows with a fresh tweezer.

Perceptions are also shifting over the chances of Turner, the head of the Financial Services Authority, post-Barclays with the bookmakers now offering nothing less than 7-2 on him getting the job.

Turner's position has been hurt by the revelations that the FSA warned Barclays that the regulator had doubts about Diamond becoming chief executive back in 2010, and that there were further concerns over his leadership expressed to the board as late as spring this year.

What has damaged Turner, and the FSA's reputation, is that nothing – seemingly – was done to translate those worries into action. It would be hard to imagine the government justifying the appointment of the chief regulator of the banks to become Governor at a time when the Bank of England is about to take on its new powers – of the banks.

Turner, who appears before the Treasury Select committee tomorrow, is supposed to have the support of George Osborne for the role. Indeed, the word is that Osborne did a deal with Turner that, if he stayed on and looked after the FSA during this latest transitional stage, he would get the Governor's job as a quid pro quo. But that deal looks like it is history now.

So the race suddenly looks much more open and exciting again, and may even prompt some people who didn't think they had a chance, to throw their hats in the ring.

It is no surprise either that betting on Sir Gus O'Donnell, the former permanent secretary to the Treasury, rose after the Libor shenanigans.

O'Donnell, known as GOD inside Whitehall, has said he may apply for the job when it is advertised in the autumn but views are mixed over his abilities; some say he's too clever by half as a politician and too close to the last government, while others argue that his many years roaming the corridors of power may be just what a new Governor will need.

Interestingly, there are several other candidates who had been considered as outsiders – such as Peter Sands, the highly-respected boss of Standard Chartered – who are now starting to be taken more seriously.

One new name that cropped up last week was Ken Costa, the former chairman of Lazard, who heads a new initiative set up by the Bishop of London, Richard Chartres, following the St Paul's Occupy protest movement that has prompted so much soul-searching, even in the City.

Costa would be an interesting candidate as he has put a more 'ethical capitalism' at the heart of his St Paul's work looking at how to put morality back into finance; and his suggestion that company boards should not look solely at maximising shareholder value as the sole criteria for satisfying the return to shareholders is a fascinating one.

There are others names emerging from inside the Bank, too, such as Andy Haldane, the director of financial stability who has written extensively about the ethics of banking, and Ben Broadbent, who sits on the Monetary Policy Committee.

Whoever takes over from Sir Mervyn King when he retires at the end of June next year will have one of the most challenging, if not the most important job in Britain.

It is ironic that Sir Mervyn, who has made his views on bankers' – their behaviour and their bonuses – crystal clear over the last few years, will leave just as banking comes back to the Old Lady. He's made his disgust plain but didn't until recently have the power to change or punish bad behaviour – well, at least until he forced Diamond's head to roll.

So he leaves his successor with an even bigger challenge because whoever is chosen will have to play a critical part in rebuilding the City's reputation as an international financial centre as well as restoring the public's trust in the UK's banks as well as the banking system.

If that isn't tough enough, the new person will arguably become the most powerful regulator in the world. From next spring the Bank of England takes over supervising 2,000 banks and insurance companies from the FSA when the new Prudential Regulatory Authority comes into force.

This is an enormous task and an historic moment; the Bank, which already employs 1,800 people, will take around a third of the FSA's existing staff to a new home in Moorgate, not far from Threadneedle Street and will be in charge of regulating, guiding and punishing – hopefully, using judgement rather than the box-ticking of the past.

Bankers may not be in favour right now but the UK's 2,000 financial firms are responsible for about 10 per cent of GDP and thousands of jobs, so it's essential that this new structure, under the right leadership, works well. It's also why the process of choosing the Governor – a Crown appointment but ultimately a Treasury one – must be as transparent and open as possible.

Who knows, maybe those who are selected for the shortlist should then be interviewed by the Treasury Select committee in public?

It would be good practice.